Debt-heavy Sherritt to sell mining assets

After some 60 years in the mining business, Sherritt Gordon Mines is putting its mining assets on the selling block in hopes of easing its debt load which at $134 million is proving to be just too cumbersome to handle.

Those mining assets include Sherritt’s 60% interest in SherrGold Mines, owner of the MacLellan mine in Lynn Lake, Man. and the Ruttan copper mine in Leaf Rapids, also in Manitoba. There is also a for-sale sign on the company’s oil and gas assets.

If these sales go through “we won’t have very much left in mining,” Russell Latham, president and chief executive officer, told The Northern Miner after the company’s annual meeting. “It’s a pity, but it’s necessary for the financial health of the company,” he adds.

And at the moment, the bottom line of this diversified company is hurting. The prime concern, says Mr Latham, is the high debt to capitalization ratio which last year rose by 70%.

The company has already made great strides in reducing this ratio, which currently stands at 58%. It accomplished this by dealing off a 50% interest in its Alberta-based fertilizer company to Unocal Canada in exchange for rights to “substantial gas reserves,” says Mr Latham. The most significant impact of this transaction will be the ownership of the gas reserves, valued at $38 million, acquired at a time of depressed gas prices for use as feedstock in the company’s fertilizer operations.

Despite the Unocal deal, Sherritt’s debt is still huge, stresses Mr Latham. While a highly leveraged balance sheet may be a positive in profitable times, it can turn nasty once economic conditions worsen. And economic conditions have worsened as far as Sherritt is concerned. Fertilizer downturn

A downturn in the company’s fertilizer division brought on by low prices was primarily responsible for the company’s loss before unusual items of $3.2 million for fiscal 1986 compared to a profit of $4.6 million in 1985. After preferred dividends, the loss per common share before unusual items was 33 cents compared to 1 cents in 1985.

After a provision for unusual costs of $24.6 million after tax was included in 1986 reflecting the write-down of the remaining asset value of the Ruttan mine and the provision for future shut-down costs, the loss per common share amounts to $1.45 versus a 89 cents loss in 1985.

The overall effect of the poor financials has been to intensify Sherritt’s actions to improve cash availablity and reduce debt.

And selling mining assets is just one method to achieve this goal. The company is also freezing salaries and wages this year, eliminating the payment of common share dividends and utilizing capital cost allowances.

“These measures are painful to shareholders and employees alike, but are absolutely necessary,” stresses Mr Latham. Through them, he hopes to shave debt by up to $40 million this year. Selling is better

Selling the Ruttan is a better alternative to shut-down, says Mr Latham. The company has been trying to find a purchaser for the copper mine for about a year. “We have been talking to some serious Canadian buyers for the operation,” he says.

Last year the mine completed its first year of operation following the completion of the $30 million mine deepening project. The planned production rate of 2.2 million tons of ore was attained and, as operating costs were better than projected, a cash operating profit of $2.6 million was recorded.

In this year’s first quarter, cash costs at Ruttan averaged 65 cents (US) per lb. However, with the weakening of the U.S dollar and its negative effect on metal prices and revenues, the mine posted an operating loss of $140,000 for this first quarter. Last year’s first quarter loss amounted to $1.8 million and included a depreciation of $2.6 million. There was no depreciation charge in this year’s first quarter as the remaining book value of the Ruttan was written off at the end of 1986.

The mine, says Mr Latham, continues to operate on plan, but requires somewhat higher metal prices to generate positive earnings.

Ore reserves at Ruttan stand at 8.871 million tons grading 1.64% copper and 1.21% zinc. Last year 66.19 million lb of copper and 21.987 lb of zinc were produced. SherrGold for sale

The company has already received numerous inquiries on its 60% interest in SherrGold. Its MacLellan mine attained commercial production at year-end, but not without difficulties. The project was plagued by construction delays, and higher than anticipated costs. The orebody was found to be less uniform than extensive drilling had indicated and mine development was slower than expected.

But significant progress has been made during its first three months of commerical operation. In the first quarter, 68,581 tons were mined and milled at a grade of 0.165 oz gold per ton to produce 8,394 oz.

Tonnage mined steadily improved during the period so that by March 91% of design capacity had been achieved. Mill rates have followed mine rates and there are indications of potential operation at 110% of rated capacity, says Mr Latham.

Milling recoveries have been ranging around 95% to 100% of design for the grades treated. Ore grades, mined to date, are below the forecast ore reserve grades and are expected to improve with better grade control and more mining experience.

There appears to be a considerable accumulation of gold in mill grinding circuits and tests have confirmed the presence of coarse gold, says Mr Latham. A gravity separation circuit has been added to the grinding circuit and results should be known in the second quarter. Mr Latham says the satisfactory operation of the mine depends on improving the grade of ore mined and recovery of gold believed to be trapped in the milling circuits.

Reserves at MacLellan’s Main zone stand at 1.6 million tons grading 0.209 oz gold per ton to the 1,600 ft level. Some 65,000 oz of gold and 90,000 oz silver are expected to be produced this year. Aggressive exploring

Exploration-wise, SherrGold is taking an aggressive approach. Out of this year’s $7.3 million budget, $4 million will be spent east of MacLellan at the Nisku project on an underground ramp and diamond drilling.

The company will also drill the Rainbow zone west of the MacLellan at a cost of $200,000. Some $1.3 million will be directed to extend mineable reserves at the MacLellan and will be capitalized as mine development costs.

SherrGold will also contribute $1.8 million of a $3 million program with joint venture partners on other prospective bets. One such project is with Trans America Industries at Wasekwan Lake. Here highly brecciated and altered volcanic and sedimentary rock was intersected with values of 0.08 oz gold per ton returned over 20 ft; 0.10 oz over 31 ft; 0.27 oz over 14 ft and 0.07 oz over 43 ft. 1987 will be tough

Even if these sales go through, Sherritt will have another tough year, says Mr Latham. First quarter results show a net loss of $2.9 million or 17 cents per common share on revenues of $86.3 million. An operating loss of $623,000 was posted.

In the same period of 1986, the net loss was $2.3 million or 16 cents per share on revenues of $97.7 million. An operating profit of $6 million was posted.

Looking at the divisions, fertilizers posted an operating loss of $3.2 million on revenues of $25.1 million in this year’s first quarter, quite a drop from a profit of $1.5 million on revenues of $29.3 million in the 1986 comparable period. Reduced selling prices in all markets were the major factor for the profit decline.

Metals came out with an operating profit of $3.1 million on revenues of $31.6 million compared to profit of $4.6 million on revenues of $41.7 million in the same period of 1986. The coinage and rolling mill segment made a postive contribution reflecting the turn-around that has occurred in the business, led by the aureate-nickel coin blank order for the Canadian dollar coin, says Mr Latham.

Special products posted an operating profit of $1.7 million on revenues of $6.1 million up from $1.6 million on revenues of $5.2 million.

Mining had an operating loss of $1.9 million on revenues of $23 million, up from a loss of $1.8 million on revenues of $20.5 million.